## Risk of Material Misstatement (ROMM)

### What is a Misstatement?

A misstatement is a difference between what is reported in the FS and what should be reported under the applicable financial reporting framework (e.g., Ind AS / AS).

Misstatements can occur across four dimensions — ACPD:

Letter	Dimension	Meaning
A	Amount	Wrong monetary value
C	Classification	Item put in wrong category
P	Presentation	Wrong grouping or display
D	Disclosure	Omitted or incorrect note disclosures

> Example of each:

> - Amount: Closing stock valued at higher of cost or NRV (should be lower of cost or NRV)

> - Classification: Revenue expenditure classified as Capital expenditure

> - Presentation: Current liabilities shown under non-current

> - Disclosure: Required disclosure of contingent liability omitted from notes

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### SA 300 Definition of ROMM

ROMM is the risk that the FS are materially misstated, prior to the audit.

It has two levels:

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### Level 1 – ROMM at Overall FS Level

Risks that relate pervasively to the FS as a whole
Affect many assertions simultaneously
Usually arise from entity-wide conditions (management integrity, going concern, etc.)

> Example: Company X is near insolvency and should prepare accounts on a Liquidation basis, but management uses Going Concern basis. This affects virtually every balance sheet figure — it is a pervasive, overall FS-level risk.

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### Level 2 – ROMM at Assertion Level

Risks attached to specific account balances, classes of transactions, or disclosures
Auditor assesses them to determine the Nature, Timing, and Extent of further audit procedures

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### What Are Assertions?

Assertions = Representations made by management, either explicit or implicit, about the elements of FS.

Audit procedures are designed to test whether these assertions hold.

#### Assertions for Balance Sheet (B/S) Items:

Assertion	What it means
Existence	Assets/liabilities exist at the balance sheet date
Rights & Obligations	Entity has rights to assets and obligations for liabilities
Completeness	All items that should be recorded are recorded
Valuation	Items are recorded at appropriate amounts
Cut-off	Transactions are recorded in the correct period
Presentation & Disclosure	Items are properly classified and disclosed

#### Assertions for P&L (Income Statement) Items:

Assertion	What it means
Occurrence	Transactions that were recorded actually occurred
Completeness	All transactions are recorded
Measurement/Accuracy	Amounts are correctly calculated
Cut-off	Transactions in correct accounting period
Presentation & Disclosure	Properly classified in FS

Worked example

### Example 1

Example – Assertion-level risk on Inventory (B/S item):

Existence risk: Inventory shown on books may not physically exist (e.g., it was sold but still on books)
Valuation risk: Inventory is valued at cost even though NRV has fallen below cost
Completeness risk: Inventory held at third-party warehouses not included in count

The auditor would design different procedures for each assertion — physical verification for Existence, NRV testing for Valuation, and confirmation letters to warehouses for Completeness.

### Example 2

Example – Overall FS-level risk:

Company Y has been making consistent losses for 3 years, its banker has recalled a major loan, and the MD has resigned. All these are indicators that the Going Concern basis may be inappropriate. This risk is pervasive — it cannot be addressed by testing one assertion or one balance. The auditor must assess the entity's ability to continue as a going concern across the entire FS.

⚠️ Common exam mistakes

Mixing up Occurrence (P&L) and Existence (B/S) — Occurrence tests whether revenue/expense transactions actually happened; Existence tests whether assets/liabilities physically exist.
Forgetting Disclosure as an assertion category — misstatements in notes to accounts (omissions, wrong amounts) are also ROMM.
Thinking ROMM is only assessed once globally — it must be assessed at BOTH the overall FS level AND the assertion level.
Confusing the four ACPD misstatement dimensions — students often think misstatements are only about wrong amounts.

Reference: SA 315 — SA 315 (Revised) – Identifying and Assessing the Risks of Material Misstatement

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Risk of Material Misstatement (ROMM) – Levels & Assertions

Worked example

⚠️ Common exam mistakes